So You Finally Decided To Buy A Home!
If you’ve finally decided to make the jump, then you’re probably going to need to take out mortgage. There’s a good chance you know a few basic things about home mortgages, such as the fact that you’ll have to make a down payment, and that most standard loan periods are for 15 or 30 years.
However, most home buyers are not familiar with the ins and outs of actually obtaining a mortgage — like the process of getting approved for a home loan or the different types of mortgages that are available. Here is a basic guide to home mortgages for home buyers.
Determining What You Can Afford
Before you decide what type of mortgage you want to apply for, you need to figure out exactly what you can afford to pay. There are three numbers you need to figure out in order to determine how much you can afford to pay for a house:
- Your annual income (after taxes)
- Your monthly debts
- The down payment you can afford to pay
Monthly outlay includes everything from credit card bills, car payments, insurance payments, costs of food, costs of transportation, entertainment and more.
Before you even think about getting a mortgage, you need to start saving up for a down payment. The larger the down payment you can make, the less you’ll end up spending in the long run. This is because you’ll be provided with better rates and your monthly premiums won’t be as high — not to mention you may end up paying your mortgage off sooner. Once you have these three numbers, use one of the many online mortgage calculators to determine the maximum cost you can afford to pay for a home.
Getting A Mortgage Pre-Approval
Now days, it’s imperative to get pre-approved for a mortgage before you begin house hunting. In New Jersey, specifically the areas I cover, the housing inventory is so tight that many homes are closing quickly, and with multiple offers. If you want your offer to be accepted, especially when there are multiple offers on the table, you absolutely must include a copy of the pre-approval with your offer. It’s just the nature of the beast right now. Plus, that pre-approval letter prevents you from viewing homes you know with certainty are out of your range. Nothing hurts more than falling in love with a home only to realize you can’t afford it.
What Your Lender May Ask You For:
Your Personal Info
This includes proof of your date of birth (such as your birth certificate), your Social Security number, proof of your marital status (such as your marriage certificate) and the number of children you have.
Your Employment And Income
The lender is going to require documentation that shows your employment status over the previous two years. They’ll also want to see how much you made over the course of that time, including not just your yearly income but also any commissions or bonuses you received.
You’ll need to show documentation that shows your asset balances, such as any money you have in checking or savings accounts, as well as investments and retirement accounts. If you’ve made any large deposits or withdrawals from any of your accounts, your lender will ask to see a paper trail.
The lender will need to see all of your debt payments and balances, including credit card debts, student loans, alimony payments, child support payments, and car loans.
Choosing The Right Mortgage
Now it’s time to pick what mortgage suits you best. A good lender will be able to help you pick a mortgage that’s suitable for you depending on the information you’ve provided. However, it’s a good idea to understand what the different options are before you speak to a lender.
Remember, the interest rates are going to vary from lender to lender, depending on not just the lender but also on your present financial situation, your employment history, your credit history and more.
These Are The 3 Main Types Of Mortgages:
1) The Fixed-Rate Mortgage
By choosing a fixed-rate mortgage, you’ll ensure that the interest rate you are paying will never change over the course of the loan. There are a few pros and cons to this. Your payments won’t be affected by the future interest rate market. If the interest rate market goes up, you’ll be paying less interest than you would if you had a variable rate. However, if the interest rate market dips, you’ll be paying more in interest than if you had a variable rate. The biggest advantage of getting a fixed-rate mortgage is that you’ll know exactly what you are paying every month for the duration of the loan, which makes it easier to budget.
Fixed-rate mortgages are available in terms of five, 10, 15, 20, 25 and 30 years, although 15- and 30-year terms are the most common. Keep in mind that the payments you are making over the first few years of a fixed-rate mortgage are going toward paying off the interest; only a small part of those payments go toward the principal of the loan.
2) Variable-Rate Mortgage (Adjustable-Rate)
A variable-rate mortgage can seem riskier than a fixed-rate mortgage; after all, the interest rate can fluctuate depending on market conditions, which means you could end up paying more than you would with a fixed-rate mortgage.
However, there are a few things you should be aware of. First of all, a variable-rate mortgage usually starts off at a fixed rate for periods of five, seven or 10 years. Only after that period has passed will you begin to pay interest based on the current market conditions. However, during that fixed-rate period, the rate of a variable-rate mortgage is often lower than that of a fixed-rate mortgage.
Don’t worry about the interest rates spiraling out of control. Variable-rate mortgages have interest rate caps on them, so you don’t end up taking a huge financial hit if rates skyrocket. Variable-rate mortgages are often a good idea for anyone looking to own a home for a short period of time rather than for the long term.
3) Jumbo Mortgage
If you plan on purchasing a home that is much more expensive than the average home, you will need to get a jumbo mortgage. The house must cost a minimum amount in order to be able to qualify for a jumbo mortgage.
The cost varies slightly throughout the country, but in most places the minimum is $417,000. There are a few areas of the country, such as Alaska, Guam, Hawaii and the U.S. Virgin Islands, where real estate costs more. The minimum cost of real estate required to be eligible for a jumbo loan in these areas is $625,500. In New Jersey, the minimum cost is $796,000.
The benefits of a jumbo mortgage? You can buy a more expensive house without having to spend all of your savings. Before jumbo mortgages were available, many homebuyers had to obtain two separate mortgages from different lenders in order to afford a pricier home.
While you need to be able to qualify for a jumbo loan — something that’s not typically that easy considering the amount of the loan — many lenders will be thrilled to provide them to those that do qualify, since they will be making much more off of interest payments, which traditionally are much higher than for regular mortgages.
You’re also given a bit of flexibility with jumbo loans, since you can choose either a fixed-rate or a variable-rate version.
The Down Payment
Lenders usually require a down payment of 5 to 20 percent. Typically, if you make a bigger down payment, then you’ll be given a better interest rate, pay less on a monthly basis and pay your mortgage off quicker. You should also keep in mind that if you pay less than 20 percent for your down payment, you’ll also have to pay mortgage insurance every month.
Bonus! Two More Special Mortgages
If your financial situation makes saving up this amount of money too difficult, you might be eligible for a specialty mortgage. These are two of the most common specialty mortgages that you might want to look into:
1) FHA Mortgage
An FHA mortgage is a loan that is insured by the Federal Housing Administration, which is part of the U.S. Department of Housing and Urban Development. FHA loans do require that you pay mortgage insurance in order to protect the lender, but they are also easier to qualify for and allow you to make smaller down payments, while still providing attractive interest rates. The size of the down payment you’ll be required to make depends on your credit score. If you have a score of 580 or higher, your down payment can be a small as 3.5 percent. But if it’s between 500 and 579, you’ll most likely have to pay around 10 percent. This makes FHA mortgages a great alternative for homebuyers with less-than-great credit. Just keep in mind that the FHA acts as an insurer, not a lender. This means you’ll need to find an FHA-approved lender in order to apply for an FHA mortgage. FHA mortgages are available for the same duration as fixed- and variable-rate mortgages.
2) VA Mortgage
A VA (Veterans Affairs) mortgage requires a minimal down payment, or in some cases, no down payment at all. You won’t be required to pay mortgage insurance every month either. You’ll need to be either a service member or a veteran in order to qualify; if you’ve been discharged, it will need to have been done under conditions other than a dishonorable discharge. You’ll need to meet a number of other service requirements set by the U.S. Department of Veterans Affairs as well.
This guide should give you a basic understanding of what kind of documentation is needed to apply for a mortgage, as well as the types of mortgages that are available to you. Keep in mind that although different mortgage lenders may offer the same types of mortgages, they may have different terms. Be sure to shop around and compare before you make a decision. In addition to obtaining a mortgage with favorable terms, you’ll want to make sure you use a mortgage lender that you trust and that will help you to the best of their abilities. Your Realtor should be able to provide you with several names of trusted lenders.
If you don’t know where to start with the mortgage process, call or text me anytime!